– The rally continues despite awful headlines including Unemployment and Social Unrest and Corona-Virus.
– Economic data is showing glimmers of hope.
– Coronavirus data is promising in most parts of the globe.
– The pace of gains in the market is unsustainable, but stocks should continue to move higher.
Sky-high Unemployment and Social Unrest and Corona-Virus, plus big gains in the market?
The S&P 500 rose 7.8% in May. News headlines certainly were not behind the rally, as U.S. coronavirus deaths surpassed 100,000, 20 million jobs were lost and the tragic death of George Floyd sparked protests throughout the country that in many cases, devolved into riots. The major disconnect between headlines and stock returns leaves many people questioning the durability of the rally. However, there are fundamental underpinnings for the rally.
Airfare and hotel prices, obviously two of the hardest hit services from the social distancing measures, have recovered about half of the 48% drop they saw since the start of the crisis. Regular continuing unemployment claims dropped last week by 3.86 million to 21.05 million. This was the first drop in continuing claims since February. Stimulus checks finally made it to most people in May, but with so many places closed, very little of it was spent. Accordingly, the savings rate jumped a record 33%, setting consumers up well to begin to spend as business reopen.
The total number of coronavirus deaths surpassed 100,000 in May, but the spread of the virus continued to weaken even as states began to reopen. Only a handful of these states were experiencing double digit weekly growth rates in new cases. Slowing infection rates are happening all around the globe and the U.S. opened later than a lot of European countries. The hope is that the slowing infection rates even with reopening that has been seen in Europe will translate to the U.S. as well. So far, the data is consistent with this hope. There are exceptions, in Brazil cases are growing at an alarming rate, Sweden, which imposed very limited social distancing measures, is seeing modestly increasing infection rates and it appears India, the world’s second most populous country may be premature in its opening efforts, having seen no slow-down in infections.
Where do we go from here?
The pace of gains in stocks is clearly unsustainable, but we do not think that we have reached the point where prices should come down. In fact, we still see average levels of upside in equities roughly 8-12% over the next year. However, we think a downside revision to our expectations is far more likely than one to the upside. If progress stalls on the economic recovery, especially on the jobs front, we would look to reduce equity exposure.
We will also be closely watching progress on the stimulus bill that has passed in the House. But it faces serious opposition in the Senate. The extension of enhanced unemployment is important to bolster the nascent recovery in consumer spending as the job market is likely to remain very weak. Unfortunately, well past the current expiration of July. There is also a provision for another round of stimulus checks to households. These measures will have to be looked at cautiously with the current ballooning deficit. But do offer upside from a market perspective.
What should I do?
With such strong gains in recent months it is easy to become overconfident in the rally. It is important to look at overall risk in your portfolio and make sure it is consistent with your long-term goals. At Adams Wealth we pride ourselves on the integration of portfolio management and financial planning. We do this so our clients can capitalize on market opportunities, without jeopardizing their long-term goals. As always, we are always here to help and hope you will reach out with any questions.
To learn more about the writer of this article, Cormac Murphy, CFA, visit: https://adamswealth.stealthmedia.com/team/cormac-murphy/
Or connect with him on LinkedIn: https://www.linkedin.com/in/cormac-murphy-cfa-33897914/.
Adams Wealth Management is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.